DBRS Comments on Pacific Capital Bancorp’s 3Q12 Results - Senior at B (high)

DBRS, Inc. (DBRS) has today commented on the 3Q12 earnings of Pacific Capital Bancorp (PCBC or the Company). DBRS rates the Company’s Issuer & Senior Debt at B (high). All ratings were placed Under Review with Positive Implications on March 12, 2012 following the Company’s announcement that it agreed to be acquired by UnionBanCal Corporation (UnionBanCal or UB).

The Company reported net income of $33.2 million, up from $24.1 million in the second quarter, and from $20.5 million in 3Q11. Highlights of the quarter include both loan and deposit growth, strong noninterest income growth and much lower expenses resulting in the Company’s best earnings since the Ford investment despite margin compression.

Net interest income was relatively stable at $61.2 million with loan growth being offset by margin contraction. Specifically, loans held for investment increased by almost 1% with loans originated or purchased increasing a very strong 18% sequentially. Meanwhile, the margin contracted 17 basis points during the quarter to 4.38%.

Provision for loan losses was $860,000 compared to $317,000 in 2Q12. The increase was driven by the standard reserve build associated with the higher loan originations and purchases, not asset quality deterioration.

Noninterest income increased $4.5 million, or 29%, to $20.1 million primarily reflecting increased gains on sales of other real estate owned, loans, and investment securities.

Noninterest expenses declined $5.2 million, or 10%, to $47.1 million. The Company attributed the decline in expenses to employee attrition related to the merger announcement with UnionBanCal Corporation, which is expected to close in 4Q12.

Loans originated or purchased since the Ford investment increased $178 million to $1.1 billion with $988,000 of these loans on nonaccrual, which equates to just 0.09% of loans originated or purchased. DBRS notes that while this performance is strong, the loans are not well-seasoned.

Capital metrics remain strong and continue to exceed the enhanced regulatory capital ratios set forth in the Operating Agreement with the Office of the Comptroller of the Currency. With no dividend payments, strong retained earnings bolstered the Company’s tangible common equity ratio by 48 basis points to a robust 13.06% during the quarter.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Alan G. Reid
Initial Rating Date: 24 October 2005
Most Recent Rating Update: 12 March 2012

For additional information on this rating, please refer to the linking document under Related Research.